Scandal-Plagued Samsung Chairman Quits

Lee Kun Hee steps down after being charged with tax evasion. Reaction among watchers is mixed; shares didn't budge

Lee Kun-Hee (C), chairman of South Korea's largest group Samsung, announced he will step down, just five days after being charged with tax evasion and breach of trust. JUNG YEON-JE/AFP/Getty Images

by Moon Ihlwan

It was one of the most stunning scenes in the history of South Korean business. Standing in front of reporters packing a basement conference room at Samsung's Seoul headquarters on the morning of Apr. 22, Lee Kun Hee, for decades the most powerful businessman in the country, announced his resignation as chairman of Korea's largest conglomerate, the Samsung Group, and chairman and co-CEO of Samsung Electronics, the world's largest maker of memory chips, liquid-crystal-display panels and TVs, and the second-largest cell-phone maker only after Nokia (NOK). Bowing deeply, Lee apologized to the nation for corporate governance problems that have been the focus of investigators for more than three months. "I'll take responsibility for all the flaws of the past," said the disgraced chairman, who was charged last week (BusinessWeek.com, 4/17/08) by a special prosecutor with tax evasion and breach of fiduciary trust.

Nobody disputes the tremendous success Samsung achieved in the past two decades under Lee's leadership. The $160 billion Samsung Group is a source of Korea Inc.'s pride, accounting for 21% of the country's total exports. The electronics unit has transformed itself from a second-tier producer of TVs and appliances into a design powerhouse and a trend-setter of the planet's information technology industry.

Yet investors and longtime watchers of Korea's chaebol, or conglomerates, responded with a relative calm over the unexpected resignation. "I don't think there will be a fundamental change in Samsung," said Ahn Young Hoe, chief investment officer at Seoul-based fund manager KTB Asset Management, which owns some $500 million in Samsung Electronics. "Lee Kun Hee will remain as a major shareholder and his family will wield influence in one way or another."

Perhaps reflecting such sentiments, Samsung Electronics shares stayed little changed, closing 0.1% higher at $678 on Apr 22. In fact, the stock has risen 20.5% so far this year against a 5.8% fall in the benchmark Kospi index on the Seoul bourse, as investors have believed the probe into Samsung could improve the company's independent management from the group while not affecting its finances. Although Lee Kun Hee is the chairman, management of the electronics unit has been firmly in the hands of respected Vice-Chairman and Chief Executive Yun Jong Yong and his team of talented professional managers who have steered the company's rise.

Shareholder activists have criticized the 66-year-old Lee and his relatives for what the activists assert is the Lee family's near-absolute control of Samsung's 59 affiliates ranging from insurance and credit-card services to shipbuilding and chipmaking, even though the Lees only have a sliver of shares of the group. The family managed to retain the tight grip because reforms in the past decade have tackled accounting and governance in listed companies but have done little to limit the founding family's control via tangled cross-shareholdings of affiliates, some of them held privately.

Critics of Samsung acknowledge Lee's resignation and other reform steps could open the way to improving Samsung's governance system. Samsung will disband the powerful Strategic Planning Office, or SPO, which prosecutors have alleged arranged illegal business deals to benefit the Lee family at the expense of other shareholders.